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Hectorite mine is unique asset says hedge fund manager Hempton
Thursday 10 Nov 2016 Author: William Cain

Hedge fund manager John Hempton at Australia-based Bronte Capital has found what he believes to be a gem of an investment on the UK stock market: specialty chemicals producer Elementis (ELM).

Hempton, best known for a long-running stand-off over controversial nutrition products group Herbalife (HLF:VYSE) with fellow financier Bill Ackmann, flags a number of attractions.

ELEMENTIS - Comparison Line Chart (Rebased to first)

Key to the investment story at Elementis is its world-leading hectorite mine which features a rare, greasy mud that is an important input into many industrial chemical products.

Other attractions include a flourishing Speciality Chemicals division producing ingredients into everything from nail varnish to fracking chemicals and market leadership in the domestic supply of chromium in the US.

Growth business

Speciality Chemicals is by far the largest of Elementis’ divisions though this was not always the case.

Rewind back to 2006 and the unit recorded £74m ($60m) in sales, roughly the same amount as Elementis’ Chromium division. Today it generates $453m of revenue with juicy operating profit margins of close to 20%.

How? Elementis has market-leading expertise in a branch of science called rheology, which is the study of how different liquids flow in varying temperatures and under different stresses. Applications are varied: Elementis sells additives that improve flow characteristics of products used in the industrial coatings industry (55% of divisional sales), decorative coatings industry (23% of sales), including paint, and oilfield products (10% of divisional sales).

Great ideas table

Market leader

Chromium does not have the same growth characteristics as Speciality Chemicals though it boasts strong margins at 27% and Elementis is the only domestic supplier in the US.

Elsewhere, Elementis has a small Surfactants business which is likely to decline over time as customers are converted into higher margin additives available through the Speciality Chemicals unit.

Competitive advantage at Elementis comes from its hectorite mine in California. Hectorite can be used to improve flow characteristics of liquids as well as to filter oil from water, among other applications.

‘This meets many Bronte tests for a fantastic business,’ wrote Hempton in an October commentary.

‘The product is a small thing that makes big things better (which gives it a lot of pricing power) and it is a consumable. And there are some pretty solid defenses against excessive competition.’

Risks at Elementis include continued weakness in the US oil and gas market as well as shipping, which has dragged on sales and profitability in the past few years. Chemical companies also tend to be sensitive to the general economic environment.(WC)


Elementis (ELM) 234.5

Stop loss: n/a

Market value: £1.08bn

Prospective PE 2017: 16.1

Dividend yield: 5.4%

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